1. Currency Unification: Foreign Exchange Volatility and Equity Returns A study of the European Union and the effects of the Euro

2. Agenda Hypothesis The Euro Zone Methodology Analysis Conclusion Further Analysis

3. Hypothesis A unified currency within a region of countries will reduce currency volatility This should decrease equity market volatility As a result lower equity returns

4. The Euro Zone Austria Belgium Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain

5. Methodology – Obtaining Data Daily currency exchange rates (1970 - 2001) Calculated an average monthly standard deviation of FX rates (proxy for volatility based on daily data) Monthly equity index returns (MSCI local currency)

6. Methodology – Testing Examined equity return correlations Examined FX correlations Regressed exchange rate deviations (with $US) against local equity returns

7. Methodology – Perform Regressions Regressed FX std deviations against local returns Performed raw direction count Metrics used – Eurodollar interest rate, world equity returns

8. Methodology - Forecasts Performed out of sample forecast for 1999- 2001 samples Calculated conditional volatility using ARCH

9. Analysis- FX

10. Analysis - Equity

11. Analysis - Regressions

12. Conclusion Increasing correlation between Euro-Zone equity Returns Convergence in currency volatilities among countries within the euro zone leading up to ccy unification Unable to prove a robust relation on equity returns with our regressions Perhaps need more variables

13. Further Analysis Equity returns are affected by a number of factors, not solely currency fluctuations Identify other variables eg. Trade, mkt cap etc. Euro introduction was not a distinct radical step in the process of economic unification, the EU has been integrated for years Identify other regions in which FX convergence might occur